SUBJECT MATTER INSURED

CHAPTER 3

SUBJECT MATTER INSURED

INTRODUCTION

Section 3 of the Marine Insurance Act 1906 declares that every lawful marine adventure’ may be insured, and the section then goes on to consider what may constitute a ‘marine adventure’:

(1)   Subject to the provisions of this Act, every lawful marine adventure may be the subject of a contract of marine insurance.

(2)   In particular, there is a marine adventure where:

(a)   any ship goods or other movables are exposed to maritime perils. Such property is in this Act referred to as ‘insurable property’;

(b)   the earning or acquisition of any freight, passage money, commission, profit, or other pecuniary benefit, or the security for any advances, loan, or disbursements, is endangered by the exposure of insurable property to maritime perils;

(c)   any liability to a third party may be incurred by the owner of, or other person interested in or responsible for, insurable property, by reason of maritime perils.

Thus, in keeping with s 3 of the Act, the following subject matter are insurable under a marine policy of insurance:

The only stipulation made by the Act with respect to the nature of the subject matter insured is that it should be ‘designated with reasonable certainty’ in the marine policy. To this effect, s 26(1) of the Act states:

The subject matter insured must be designated in a marine policy with reasonable certainty.

Failure to designate the subject matter in the policy with reasonable certainty could be construed as non-disclosure of a material circumstance.1

However, it is emphasised that, whilst the subject matter within the policy must be designated with reasonable certainty, there is no requirement for the assured to indicate the nature and extent of his interest in the policy. Thus, it is not necessary in the case of reinsurance for the policy to stipulate that it is in fact a policy of reinsurance. This was well illustrated in Mackenzie v Whitworth, below.

Mackenzie v Whitworth (1875) 1 Ex D 36, CA

A cargo of cotton was insured by American underwriters for a voyage from New Orleans to Revel (now Tallin) in Estonia. The American underwriters then reinsured a portion of the cotton without disclosing the fact that the policy was in fact a policy of reinsurance. When the American underwriters came to claim on their policy of reinsurance, the reinsurers refused to pay, asserting that they had not been informed that the policy was one of reinsurance.

The Court of Appeal, however, ruled that, although the reinsurers had not been informed that the policy was one of reinsurance, it did not amount to the concealment of a material fact.

Blackburn J: [p 40] …A description of the subject matter of insurance is required both from the nature of the contract and from the universal practice of insurers. It is generally described very concisely as being so much ‘on ship’, ‘on goods’, ‘on freight’, ‘on profits on goods’, ‘on advances on coolies’, ‘on emigrant money’, and many other examples might be given. And, if no property which answers the description in the policy be at risk, the policy will not attach, though the assured may have other property at risk of equal or greater value. The reason being, that the insurers have not entered into a contract to indemnify the assured for any loss on that other property.

[p 42] …In all cases where the peculiar nature of the interest alters the risk, it may be properly said that such interest is the subject matter of the insurance; and at all events there is great force in the argument that the nature of that interest should be stated. But in the case now before us, the nature of the interest of the parties assured in the cotton does not in the slightest degree vary the nature of the risk…The subject matter of insurance, viz, the cotton, is fully described, and there is no apparent reason which would make it just to require the nature of the interest to be described. Still, if there were a series of decisions determining that in such a case, or in cases analogous to it, a description was required beyond what would seem to us reasonable, we would be unwilling to disturb the established practice. But we do not find any such decisions.

SHIP

The plaintiff owners of the steamship Oxenholme insured her ‘hull and machinery’ with the defendants under a time policy of insurance which contained a warranty that £5,000 was to be uninsured. As the ship was valued at £10,000, the plaintiffs effected hull and machinery policies to the extent of £5,000 and no more. However, the plaintiffs effected further ppi policies2 on disbursements made on coals, stores and expenses totalling £2,600. When Oxenholme was lost, and the plaintiffs claimed on their insurance, the insurers refused payment, on the basis that the plaintiffs had exceeded the £5,000 warranty when they insured the disbursements.

The Court of Appeal, in affirming the decision of the trial judge, ruled in favour of the plaintiff owners. The ppi policies on disbursements did not relate to the hull and machinery policies and, therefore, there was no breach of the warranty.

Lord Esher MR: [p 384] …The defendant company have departed from the use of the word ‘ship’, and have used instead of it another term—‘hull and machinery’ – and we have to construe those words. The ‘hull’ of a ship is a well known term. If you were to tell a sailor that the ‘hull’ of his ship included the provisions on board, he would be very much surprised; and so he would if he were told that the provisions were part of the ‘machinery’ of the ship. Taking the words ‘hull and machinery’ in their ordinary natural sense, it is perfectly clear what they mean. Has it then been proved that these words have, as between assurer and assured, universally acquired a meaning different from their natural meaning? In my opinion, the learned judge was quite right in holding that this had not been proved. I am satisfied that the words ‘hull and machinery’ cannot be taken as including those things which are covered by the ‘disbursement’ policies. It follows that the defence of breach of warranty cannot be maintained, and the learned judge was right in so holding.

A vessel employed continuously in the Black Sea grain trade was insured under a policy on ‘ship and furniture’. When the vessel collided with a pier-head and severely damaged her bow section, where a large number of dunnage mats3 and separation cloths were stowed, the owners of the ship claimed on their policy for the loss of the dunnage mats and separation cloths which had floated away. The underwriters defended the action, on the basis that the dunnage mats and separation cloths were not covered by the policy.

The court ruled that the owners could recover under the policy because the insurance was on ‘ship and furniture’.

Bigham J: [p 402] …In my opinion, the plaintiffs are entitled to succeed. The question is whether an ordinary Lloyd’s time policy on ship, the ship being engaged in the grain trade, covers separation cloths and dunnage mats. It seems clear that, under the ordinary circumstances of that trade, the use of such cloths and mats would be necessary for the proper carriage of the cargo, and that if the ship went to sea without them, she would be unseaworthy. Therefore, they must be regarded as forming part of her furniture. I can see no distinction between them and movable bulkheads, which it was admitted by the defendants would form part of the ship’s furniture. Both are intended for the same purpose—namely, to separate one part of the cargo from another.

Hull policies (MAR 91 form) and the Institute Hulls Clauses

There are two standard sets of Institute Hulls Clauses which may be employed with, and only with, the current Lloyd’s Marine Policy (MAR 91)4 and the Institute of London Underwriting Companies Marine Policy Form (MAR91).⁵

The standard hull policies are:⁶

(a)   the Institute Time Clauses Hulls, 1/11/95 (ITCH(95));⁷

(b)   the Institute Voyage Clauses Hulls, 1/11/95 (IVCH(95)).⁸

All the Institute Clauses are unreservedly subject to English law and practice,⁹ but it should be noted that the ITCH(95) and the IVCH(95) are less favourable to the assured than the 1983 Clauses.¹⁰

GOODS

‘Goods’ are defined in the first part of r 17 of the Rules for Construction thus:

The term ‘goods’ means goods in the nature of merchandise, and does not include personal effects or provisions and stores for use on board.

Goods, therefore, are restricted to those goods which are merchantable in the way of trade; ship’s provisions and stores as well as personal effects¹¹ are excluded under the definition.

The Institute Cargo Clauses (A), (B) and (C)

Goods may be insured under the Institute Cargo Clauses (A), (B) and (C).12 Whereas the ICC (B) and (C) provide cover for enumerated perils, the ICC (A) provides ‘all risks’ cover and, because of this, has the added and important advantage of making the burden of proof placed upon a claimant less rigorous. Unlike the ICC (B) and (C), under the ICC (A), the claimant does not have to show how the loss occurred, only that it did occur. It then falls upon the insurer to prove that the loss fell within one of the exceptions in the policy for which he is not liable.

Deck cargo and living animals

The second part of r 17 of the Rules for Construction affirms that:

In the absence of any usage to the contrary, deck cargo and living animals must be insured specifically, and not under the general denomination of goods.

Thus, the Act confirms that, because of the special nature and hazards which are commensurate with the carriage of deck cargo and living animals, they must be specifically insured as such unless there is ‘usage to the contrary’.

The importance of complying with r 17 was illustrated in the case of Hood v West End Motor Car Packing Co [1917] 2 KB 38, CA, where the plaintiff instructed the defendants, who specialised in the packing of cars, to forward his motor car from London to Messina in Sicily. In the event, the car was carried on deck without the insurers’ knowledge, and when it arrived at Messina, it was found to be damaged beyond repair. As the insurers refused to pay the claim, the plaintiff sued the defendants.

The Court of Appeal ruled that the risk of carrying a car on deck was not covered by the insurance policy and the defendants, who had agreed to insure the car as part of the contract with the plaintiff, were liable.

Scrutton LJ: [p 47] …Upon the true construction of the documents, I think that the defendants undertook the latter obligation, namely, to procure a policy against all risks except war risks. The next question is, have they performed that obligation? They shipped the car on deck. In the body of the policy it is stated that the insurance was ‘on motor car’, not stating that the car was to be carried on deck. By the old law before the Marine Insurance Act 1906, and now by r 17 of the Rules for Construction of Policy in Sched I to the Act, in the absence of any usage to the contrary, cargo carried on deck must be insured specifically. The defendants, therefore, have not procured a policy in terms covering a motor car carried on deck against all marine risks.

Is r 17 applicable to deck cargoes carried on inland voyages?

This question was raised in Apollinaris Co v Nord Deutsche Insurance Co, below. The issue of whether the general rule contained in r 17 regarding deck cargoes was inapplicable to all inland voyages was left open. However, Walton J was ‘by no means satisfied’ that the rule should apply to inland voyages by canal or river. This is not an unreasonable supposition, as the rationale that there is an increase in hazard when goods are carried on deck on sea voyages applies with much less force in the case of inland voyages.13

Apollinaris Co v Nord Deutsche Insurance Co [1904] 1 KB 252

The plaintiffs insured a variety of goods with the defendants against all risks for a voyage from London to Amsterdam and thence up the River Rhine to Neuenahr. On arrival at Amsterdam, the goods were transhipped and stowed on the deck of a Rhine steamer in readiness for the canal and river passage. However, a fire broke out, and many of the goods were destroyed. When the plaintiffs claimed on their policy of insurance, the insurers refused to pay, on the basis that they, the insurers, had not been notified that the goods were to be carried on deck.

The court ruled that, as it was common practice for goods to be stowed on the deck of Rhine steamers and, therefore, as the goods need not be specifically insured, the insurers were liable under the policy.

Walton J: [p 261] …the same gentleman [a Dutch lawyer] who proved the Dutch law also proved that deck cargoes are very commonly carried on the Rhine steamers, and I understood from his evidence that the usual form of bill of lading used by the Rhine steamers gives express liberty to stow cargo on deck…I have come to the conclusion that it is, and has been for many years, the practice and usage to carry deck cargoes on Rhine steamers plying from Amsterdam…The fact that the shipowners undertake a greater liability for cargo on deck than for cargo carried under deck does not appear to me to affect the question as between the assured and the underwriters.

[p 262] …I am by no means satisfied that the rule [referring to r 17] which exempts underwriters from liability for the loss of deck cargo applies to inland voyages by canal or river. I am satisfied that it does not apply to an inland voyage by canal and river plainly contemplated by the policy, on which voyage it is and has been for many years the practice and usage for steamers and other vessels to carry cargoes on deck.

Meaning of usage to the contrary

That the word ‘usage’ refers to the usage in a particular trade, and not to the usage in insurance, was confirmed by the House of Lords in British and Foreign Marine Insurance Co v Gaunt, below.

British and Foreign Marine Insurance Co v Gaunt [1921] 2 AC 41, HL

What is the meaning of these words as to usage which are prefixed to the second part of r 17? In the case of deck cargo, I think that these words would be satisfied by proof of a usage in a particular trade, or generally, to carry on deck goods of a particular kind. The underwriter is bound to know of the existence of such usages, and the description of particular goods as of the class to which such a usage applies gives him the information that the goods will or may be carried on deck. If there is such a usage, there is no reason for requiring a statement that goods which fall within it are, in fact, to be carried on deck, as the mere description of the goods gives the necessary information. Such a usage may be fairly described as ‘a usage to the contrary’. I cannot adopt the appellants’ contention that the usage must be a usage not in the carrying trade with regard to such goods, but in the insurance world with reference to the manner in which they are to be described for insurance purposes. Such a usage as to insurance may, of course, grow up in any trade in which deck carriage of certain articles prevails, and if such a usage in the business of insurance has grown up it will be a usage to the contrary. But, in my opinion, no such usage in the business of insurance is necessary to dispense with the specific description of deck cargo as such. Any such construction of r 17 would bring it into acute conflict with the law as to insurance of deck cargo as it existed up to 1906, and is not, in my opinion, warranted by the wording of the rule.

A general test appears to be that where the containers or packing materials are supplied by the owner of the goods and may also be considered, for practical purposes, as an integral part of the goods, then the containers and packing materials should be included within the cover provided by the policy of insurance.14 Much, therefore, depends upon a question of construction of the policy.

Insurance on goods includes loss of the adventure

When goods are insured, they are insured not only against physical loss or damage, but also for a loss brought about by the loss of the voyage or adventure which has prevented the goods from reaching their destination. That is, even though the goods remain physically intact and are still within the control and possession of the assured, the insurers may be liable for the loss of the voyage or adventure provided that the loss of the voyage or adventure was brought about by a peril insured against.

This concept, where goods are concerned, that there can be a loss brought about by the loss of the venture itself is not new.15 Under common law, the concept was well established,¹⁶ but it was not until the case of British and Foreign Marine Insurance Co Ltd v Samuel Sanday and Co, below, came before the House of Lords that it was confirmed that the doctrine of loss of venture also applied to the Act.

British and Foreign Marine Insurance Co Ltd v Samuel Sanday and Co [1915] 1 AC 650, HL

A British firm of corn merchants shipped two consignments of linseed and wheat aboard the British steamships St Andrew and Orthia from Argentina to Hamburg. Before the ships reached Hamburg, hostilities broke out between Germany and Great Britain and both vessels were ordered into British ports. The cargo-owners warehoused their goods and served notice of abandonment on their insurers.

The House of Lords, affirming the decisions of both the lower courts, ruled that there was a total loss of the adventure itself caused by the restraint of princes, a peril insured against. Therefore, the cargo-owners could recover under their policy of insurance.

Earl Loreburn: [p 656] …The first question is whether the old rule still prevails, that upon an insurance on goods, substantially in the words of these policies, the frustration of the adventure by an insured peril is a loss recoverable against underwriters, though the goods themselves are safe and sound.

[p 657] …The words of this policy have for generations been understood and held by judges to designate not merely the goods, but also the adventure. So far from abrogating this designation of subject matter, I should have thought the Act took pains to preserve it and others like it.

Lord Wrenbury: [p 673] …If, then, in marine insurance, a policy on goods means by usage a policy on the safe arrival of goods, that meaning is by s 26 preserved. Section 60 is as to constructive total loss, and sub-s 2(iii) provides that, in the case of damage to goods, there is a constructive total loss when the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival. Lastly, s 91(2) enacts that the rules of the common law, including the law merchant, save in so far as they are inconsistent with the express provisions of this Act, shall continue to apply to contracts of marine insurance.

My Lords, these provisions seem to me ample to support the conclusion at which I have arrived, that the Act of 1906 has not altered but has preserved the law upon this point as it stood before 1906, and that law was that, under a policy on goods at and from a port to a port, the venture, and not the goods merely, was the subject matter insured.

Following the House of Lords’ decision in the Sunday case, above, where insurers were held to be liable, under a policy on goods, for the loss of the venture itself because it was caused by the restraint of princes, an insured peril, a frustration clause was introduced into the Institute War Clauses (Cargo)17 to ensure that insurers are now excepted from such liability. Clause 3.7 of the Institute War Clauses (Cargo) states:

In no case shall this insurance cover…any claim based upon loss of or frustration of the voyage or adventure.

MOVABLES

The term ‘movables’ is defined by s 90 of the Act thus:

‘Movables’ means any movable tangible property, other than the ship, and includes money, valuable securities, and other documents:

That ‘movables’ are insurable under a policy of marine insurance is confirmed by s 3(2)(a) of the Act; the only proviso being that such movables ‘…are exposed to maritime perils’.

FREIGHT

The subject of ‘freight’ can be confusing because, primarily, the payment of freight is concerned with contracts of carriage, not marine insurance. However, freight is also an insurable subject matter and, therefore, relevant to marine insurance. Thus, where freight is concerned, contracts of carriage and contracts of insurance, though separate issues, are closely related.

Freight may be insured under a policy incorporating the Institute Time Clauses – Freight (1995) (ITCF(95))¹⁸ or the Institute Voyage Clauses – Freight (1995) (IVCF(95)).¹⁹

Meaning of freight

Lord Tenterden CJ: [p 48] …If it be a necessary ingredient in the composition of freight, that there should be a money compensation paid by one person to another, the benefit accruing to a shipowner from using his own ship to carry his own goods is not freight. But if the term freight, as used in the policy of insurance, import the benefit derived from the employment of the ship, then there has been a loss of freight. It is the same thing to the shipowner whether he receives the benefit of the use of his ship by a money payment from one person who charters the whole ship, who from various persons who put specific quantities of goods on board, or from persons who pay him the value of his own goods at the port of delivery, increased by their carriage in his own ship.

And, in Ikerigi Compania Naviera SA v Palmer, ‘Wondrous’ [1991] 1 Lloyd’s Rep 400; aff’d [1992] 2 Lloyd’s Rep 566, CA, where a vessel was detained in Iran because of the non-payment of port dues and freight tax, at first instance, Hobhouse J had reason to consider the concept of freight.20

Hobhouse J: [p 417] …Freight insurance is concerned with the earnings or potential earnings of the vessel, not with the expenses of earning those sums. It is not concerned as such with the fact that the voyage took longer, nor with the fact that the costs of performing it were higher than expected. Save possibly in special situations such as general average, it is a gross, not a net concept; it is not a profits insurance, but has as its underlying concept that part of the value of a vessel or of a voyage or other adventure as its capacity to earn freights.

The Act only refers to ‘freight’ in general terms and does not differentiate between the two types of freight, namely, ‘ordinary’ and ‘chartered’.21 However, this does not appear to have been considered by the courts to be in contravention of s 26(1), which stipulates that the subject matter insured must be designated with reasonable certainty.

Indeed, the form of policies on freight was an issue bemoaned by Scott LJ in Kulukundis v Norwich Union Fire Insurance Society [1937] 1 KB 1, CA,